Estate planning is a crucial step to protecting your family, your legacy, and the assets for which you have worked so hard. No matter where you are in life, you should make planning your estate a priority, and you’ll see why as you read through this article.

After you understand why it’s so important to have a rock-solid, bulletproof estate plan for unplanned life events as well as after death, I’ll give you the tools needed for you to take your first step in making a plan today. 

What is estate planning?

An estate plan is a part of your overall financial and retirement plan for how your assets (cash, investments, real estate, personal property, and business) will be managed and inherited once you pass away or become unable to make decisions for yourself. 

The goals of an estate plan are to:

  • Protect your legacy, assets, business, and family (including your pets)
  • Maintain your privacy
  • Determine what health care you do or do not wish to receive

An estate plan can become very involved and intricate, but the basic foundation consists of a:

  • Will
  • Trust
  • Power of Attorney

Your estate plan will give you peace of mind for how your assets and even your personal values will be passed along after death, and how you will be treated in life if unable to make decisions. 

Do you really need an estate plan?

Yes, you do. However, about two-thirds of Americans don’t have one because of the many misconceptions about estate planning.

Some common misconceptions are:

  • It’s only for the elderly
  • Only the super-rich need an estate plan
  • The right time to make the plan is in retirement
  • I told my spouse and family what I want to happen when I die

I want you to know that everyone, regardless of age, state of health, or net worth should make a plan and you should do it sooner, not later.

If you are preparing for retirement you need to make estate planning a priority!

Greg Phelps, Wealth Steward

If you’re still not convinced estate planning is important, let’s talk about what’s going to happen if you don’t make a plan. More specifically what happens if you become unable to make decisions for yourself or you pass away.

What will happen if I don’t have an estate plan?

If you don’t have a plan, the courts will make one for you; you probably will not like their distribution of the assets and the entire process will be an absolute nightmare for the ones you love.

Some of your assets will go through a court process, which varies by state, called probate.

The main assets that go through probate when there is no estate plan are property, such as real estate or a car that was solely owned by the deceased person. Assets under joint ownership (aka tenants in common), such as a business or an investment, would also be subject to probate. 

There are major disadvantages to probate:

  • It’s expensive and time-consuming
  • Private records become public (your estate would become public knowledge)
  • Assets are distributed according to intestacy law (which may mean your real estate is sold so that it can be “distributed evenly” to your family)
  • Court-appointed guardians may make decisions that you never wanted

There are other potentially devastating consequences to not having a plan.

If you have children that are minors or pets, who is going to care for them? 

What if you need long term care (LTC)? Without an estate plan, the court may spend down your assets to pay for expensive long-term care

Unfortunately, Medicare—and most private insurance—will not cover those long-term care expenses. Medicaid does pay for long-term care, but there are strict financial eligibility requirements that vary from state to state. 

How can I avoid the probate process?

Depending on the asset, you can name a beneficiary, have Transfer On Death (TOD) instructions, create a trust, or establish Rights Of Survivorship.

Retirement accounts (IRAs, 401(k)s, 403(b)s), brokerage accounts, and cash aren’t always subject to probate as long as there is a beneficiary or TOD listed on those accounts.

Here are 6 simple ways to avoid the probate process.

How much does probate cost compared to the cost of estate planning?

The fees for making an estate plan vary widely depending on the state and how estate attorneys value their time. A rough estimate would be around $1,500 to $4,000+.

Most quality attorneys here in Las Vegas charge around $2,500 for an estate plan. That being said, you can find plenty of attorneys offering uber-cheap estate plans (think $500 or less) in hopes of getting the probate work when you die! Don’t be fooled by the price . . . hire a reputable estate planning attorney.

Although the price tag may seem steep, a properly executed estate plan (which absolutely requires an attorney because even the slightest mistake or discrepancy can lead to legal disputes) can save you (technically your loved ones) thousands by avoiding probate court.

Just how expensive can the probate process be? According to the legal information site Nolo, if your gross assets total $400,000 your family could easily pay over $20,000 in probate attorney fees plus:

  • Approximately $1,000 (or more) in probate court fees, plus
  • Business valuation fees, plus
  • Appraisal fees of real estate and personal property

So it’s a no-brainer to pay for estate planning upfront! An estate attorney that properly helps you create an estate plan to protect your assets and avoid probate court is worth their weight in gold. 

Also, think of the emotional state that your family will be in when you are no longer here. You can avoid further emotional strain by having a proper plan in place. 

Is an estate plan only for after you die?

No. Part of estate planning is to have a plan for if you are ever unable to make your own decisions in life. 

Who will take care of your kids if, god forbid, you suffer a traumatic brain injury next year? It’s not something anyone wants to think about, but life happens. 

You need an estate plan to ensure your wishes will be fulfilled!
You need an estate plan to ensure your wishes will be fulfilled!

Who will manage your investments, your business, and make rent or mortgage payments? 

Again, if you don’t have a plan, a court could decide for you.

Without an estate plan, your family will be left with the burden of making life and death medical decisions, and this may destroy family relationships.

Below, I mention the Terri Schiavo story which demonstrates just how important it is to have a plan in place for making medical decisions. 

What are the components of an estate plan?

The pillars of an estate plan include a will, a trust, and power of attorney. All three of these components come in different forms.

Will vs. a Living Will

A will is a written legal document that details how you want to distribute your property and assets when you die—the time at which a will goes into effect. It also allows you to detail wishes for your funeral and your preference for burial, cremation, or donation of body.

A ‘living will’, also called an advanced health care directive, goes into effect once you are incapacitated and includes details on what level of healthcare you want. For example, you may have a desire to never be put on life support, or to only be put on life support under certain circumstances, or whatever wishes you have if you can’t make those decisions for yourself. 

A last ‘will and testament’ allow you to express how personal property will be distributed and to appoint a guardian for your children.

It’s wouldn’t be practical to list all of your healthcare and financial wishes in a single document—but the major ones, yes! So in addition to the living will, you will want to designate someone to make medical and financial decisions for you.

A designation for healthcare decisions is done via a healthcare proxy, also called a durable power of attorney. There are four main types of power of attorney that you may need in your estate planning.

The Terri Schiavo Story

To put the health care directive in perspective, let’s examine a real example of how the lack of legally documented wishes can have a painful outcome.

One of the most talked-about cases in this country is that of Terri Schiavo who fell into a persistent vegetative state after suffering a cardiac arrest at the age of 26. What ensued was a family dispute that eventually landed in the high court of Florida.

Terri’s husband, Michael, felt that Terri would not have wanted to be kept alive through a feeding tube and advocated that it be removed so that she could die with dignity. The problem was that there were no advanced directives for Terri, so her true wishes weren’t known. 

Terri’s parents were determined to keep her alive at all costs as they were convinced that she would recover from her vegetative state, despite multiple physician opinions that it wasn’t possible. Her feeding tube was removed, but Florida governor Jeb Bush signed Terri’s law and the tube was reinserted.

Finally, after several years of legal proceedings, the feeding tube was ordered to be removed and Terri died 13 days later.

The story highlights the importance of having advanced medical directives so that you can avoid a similar fate and not force your family, or a court, to make very difficult decisions that may not align with your own wishes. 

Wills have a limit and don’t protect all assets from probate—which is where a Trust comes into the picture.

Trusts

There are two major categories of trusts.

  1. A revocable trust (also called a living trust, a revocable living trust, or ‘inter vivos’)
  2. An irrevocable trust

A trust goes into effect once you make it and represents an agreement held between a trustee (for example, the person or entity that drafts the trust), a beneficiary, and a third party that holds assets for the beneficiary.

Lastly, some trusts are designed to maximize tax efficiency when an estate is inherited.

There are several ways that trusts can be structured in how and when assets will be distributed. In contrast to a will, which only covers individually owned property, a trust covers jointly owned property. 

In most circumstances, a trust avoids the probate process so they are an important tool in estate planning. 

Some common trust types include:

‘A’ trust (Marital trust) – benefits the surviving spouse

‘B’ trust (Bypass trust) – used to maximize federal estate tax exemptions

Irrevocable life insurance trust – protects life insurance benefits received by the surviving spouse 

Something to keep in mind when it comes to wills and trusts is that any debt owed to creditors could affect the degree to which your will and/or trusts are carried out. 

How can you protect your business as part of an estate plan?

If you own a business, its structure will determine what happens to it when you die.

If you have a sole proprietorship, your death could mean the death of the business. If you don’t have a way to pass it on, like with a will, then it will enter into probate.

If you have a corporation, then the estate essentially becomes the owner of the business at your death. With no will, intestacy laws would take over.

You can set up a will to allow a beneficiary to take over operations, or have the business distributed another way. Regardless, it’s always best to transfer your business according to your desires and not intestacy laws.

Forming a Limited Liability Company (LLC) may be yet another strategy that could save your business. A lot depends on what exactly you want to happen to your business when you are gone and is yet another reason to hire an attorney to plan for a smooth transition. 

There are many details and strategies for protecting your business which is yet another reason to hire an estate attorney. 

What is the federal estate tax?

The federal estate tax is “a tax on your right to transfer assets and interests.” Although the common sentiment is that the government is going to take away all of your stuff, the reality is that only a very small percentage of estates ends up owing a tax – about 0.2% of total estates owe a tax.

In addition, some states and Washington D.C have either an estate tax or an inheritance tax. Those states are OR, WA, MN, IL, ME, MA, RI, CT, NJ, DE, MD, NY, VT, HI, IA, NE, PA, KY.

An inheritance tax is incurred after the beneficiary inherits the assets whereas an estate tax is applied (if at all) to the assets prior to inheritance. 

No estate tax is applied to the surviving spouse when assets are transferred to them—this is protected by the unlimited marital deduction.

But, when the surviving spouse passes away, the inheriting individual—the beneficiary—may owe an estate tax if the estate surpasses the exclusion limit. The 2019 exclusion limit is $11.4 million. 

That exclusion is per person not per estate, so when an estate plan is executed properly the exclusion could nearly 23 million dollars! I hope my boys pay federal estate tax one day 🙂

Even if the gross estate value surpasses the exclusion limit, a tax is only applied if the net estate (the gross estate value minus certain additional tax credits and deductions) remains over $11.4 million per person.

There are actions that wealthy estates can take to lower or avoid the estate tax, they include gifts, donations, and certain types of trusts. 

How do you begin planning your estate?

To get started on your estate plan, use the following checklist for guidance:

  • Add beneficiaries to your retirement, bank, brokerage accounts, and other relevant accounts (to protect these from probate)
  • Determine what your wishes are for your healthcare and for your funeral (so that you can make advance directives and designate a power of attorney)
  • Decide how you want your property and assets distributed
  • Perform an inventory of assets and organize documents
  • Gather all of your necessary forms, like titles and insurance policies
  • Involve your significant other
  • Find a professional estate planning attorney (see below)
  • Work with your chosen attorney to create a rock-solid plan and determine what the exact components of your plan will be

How do you find an estate planning attorney?

If you are local to Las Vegas, I would be happy to recommend to you some great estate attorneys that we have in the area.

The general process for looking for an estate planning attorney is very similar to the one used to find the best financial advisor for your specific situation.

  1. Search for an attorney that specializes in your needs
  2. Check their credentials
  3. Interview them to see if they are the correct fit for you
  4. Ask about their fees

If you need any help, references or answers remember that I am always here for you. Never hesitate to contact me for all of your planning needs!

Sources:

https://www.fidelity.com/viewpoints/personal-finance/do-you-need-an-estate-plan

https://www.estateplanning.com/What-is-Estate-Planning/

https://www.nolo.com/legal-encyclopedia/what-is-estate-planning.html

https://longtermcare.acl.gov/costs-how-to-pay/costs-of-care.html

https://info.legalzoom.com/difference-between-living-last-testament-3924.html

https://www.legalzoom.com/articles/what-is-a-power-of-attorney

https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

http://www.401khelpcenter.com/401k_education/beneficiary_2.html#.XSbOl-hKjIV

https://www.aarp.org/money/investing/info-2017/half-of-adults-do-not-have-wills.html

https://money.usnews.com/money/personal-finance/articles/2014/10/07/5-questions-to-ask-before-writing-a-living-will

https://smartasset.com/taxes/5-ways-the-rich-can-avoid-the-estate-tax

https://www.pashalaw.com/business-owner-dies/

https://www.schwab.com/public/file/P-1625576/